Managerial Legacies, Entrenchment and Strategic Inertia
47 Pages Posted: 24 Mar 2005 Last revised: 27 Mar 2010
Date Written: March 25, 2010
This paper argues that the legacy potential of a firm's strategy is an important determinant of CEO compensation, turnover and strategy change. A legacy makes CEO replacement expensive, because firm performance can only partially be attributed to a newly employed manager. Boards may therefore optimally allow an incumbent to be entrenched. Moreover, when a firm changes strategy it is optimal to change the CEO, because the incumbent has a vested interest in seeing the new strategy fail. Even though CEOs have no specific skills in our model, it can explain the empirical association between CEO and strategy change.
Keywords: Reputational concerns, CEO turnover, compensation
JEL Classification: D82, G30, J33
Suggested Citation: Suggested Citation